Wednesday, July 1, 2015

Puerto Rico's Debt - Update

WSJ today reported that Puerto Rico Electric Power Authority (PREPA) and its bondholders are close to a deal that would cover the $400 million plus due to bondholders and avoid default.

Yesterday, Dealbook ran "The Bonds that Broke Puerto Rico" offering an explanation of how Puerto Rico could issue "enough debt to crush it." The answer: "a confluence of factors, including American investors' desire to avoid taxes; the mutual fund industry's practice of competing on the basis of yield; complacency about the practice of long-term borrowing to plug holes in budgets; and laws [Puerto Rican] that supposedly give bond buyers ironclad guarantees."

MoneyBeat ran Puerto Rico's Crisis Deals a Blow to Municipal-Bond Funds providing more detail on the impact of Puerto Rico's debt problems on the municipal bond market. Puerto Rico's $3.5 billion in general-obligation bonds issued in 2014 had a yield of 8.7%, compared to the yield on 10-year U.S. treasury notes which was around 2-3% over the same period. Interest on Puerto Rican bonds is federal and state tax free for investors in every state. Interest on other municipal bonds is exempt from federal tax, but exempt from state tax only if the investor lives in the state that issued the bonds. Single-state municipal bond funds have used Puerto Rican bonds to diversify and boost yield.